TT232: Mortgage interest tax relief – proposed changes

December 03, 2015

On the 8th July 2015 the government announced plans to restrict finance cost relief for individual landlords. The measures are to be phased in from the 6th April 2017 and will take full effect from the 6th April 2020.

Finance costs such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans will only receive a basic rate reduction against rental profits instead of the marginal rate reduction they currently receive.

The stated aim of this policy is to ‘make the tax system fairer…to ensure that landlords with higher incomes no longer receive the most generous tax treatment’.

This stated aim does not appear to sit well with our analysis of the policy. A policy which restricts an expense incurred wholly and exclusively in the course of the trade to a fraction of its true cost for higher and additional rate taxpayers. A policy which can lead to the restriction on child benefit and other state benefits even if your rental profit does not cause you to exceed the relevant thresholds. And a policy which can, in extreme cases, lead to a tax charge attributable to your rental profits greater than your actual rental profits.

What should you do? Well, the good news is that there are options available to you and time to implement them to mitigate the effect of this change in legislation. However, there is no ‘one size fits all’ solution and the best option available to you will depend on a number of factors including the amount of borrowing you have compared to your rental turnover, your long term goals for your property portfolio and other commercial factors.

If you are in a position of being affected by the change in legislation, we would urge you to contact us about your requirements and goals and how these can be achieved in the most tax efficient way possible.